New rules from the Securities and Exchange Commission could make money market funds more resilient against financial market shocks, increase transparency, offer better protections for investors, and provide closer oversight from regulators, panelists said during a webinar hosted by BNY Mellon Asset Servicing.
Money funds have faced heavy scrutiny across the industry in the past two years since The Reserve, the industry’s first money fund provider, saw its largest money fund “break the buck” in 2008.
Edward Von Sauers, a senior credit analyst for Dreyfus Investments, which is a unit of BNY Mellon, said that money market fund took their share of hits during the financial crisis, as investors panicked after the failure of Lehman Brothers and rushed to withdraw money from these vehicles, including funds that had no exposure to Lehman.
Changes from the SEC, which were announced Tuesday, call for new limits on the ability of money funds to acquire securities with lower credit quality; restricting the funds to holding no more than 3% of their assets in second-tier debt; banning them from holding more than half of 1% of their total securities from a single issuer; and restricting them from buying securities that mature after 45 days, Matthew J. Bromberg, a managing director and senior counsel for BNY Mellon, [BK] said during Wednesday's webinar.
Money market funds will also be restricted from buying second-tier credit securities with maturities of longer than 45 days. The fixed-income industry did not see that as a material change, however. Although the previous limit was 397 days, most money market funds held second-tier debt in that range.
Other changes are meant to shore up liquidity in money market funds, or their ability to sell a security at carry costs in seven days. The SEC proposed that money market funds hold a minimum of 5% of assets in highly liquid securities.
But the SEC acknowledged that sometimes money market funds would fail and liquidate their assets. But they believe it should be orderly. In an attempt to avoid a run on a fund, the regulator suggested that if a fund should breaks the buck, or see its net asset values fall below $1 per share, a fund’s board of directors should be able to suspend redemptions to allow for an orderly liquidation.
The SEC also suggested a couple of new requirements to improve disclosures about the funds’ holdings and trading activities. Currently, money funds have to file twice annual reports to the SEC, but that will be bumped up to every 60 days if the proposed rules are adopted.
“The consensus is the amendments will go a long way to enhancing the resiliency of the money market funds … and the ability of the SEC to oversee them,” Bromberg said.
The SEC’s proposals are one of several being floated in the bond industry right now, said Joan Ohlbaum Swirsky, counsel for the management/mutual funds practice group at law firm Stradley Ronon. Among them is a suggestion that they be regulated like banks. Promoting the smooth operations of the money markets is one thing, but it should not be done at the expense of investors who need safer investment options, or companies and local governments who rely on the markets as a source of funding, Swirsky said.